Chapter 8

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified audit opinion has been issued; 2% is the same as audit assurance of 98%. Also called overall assurance and level of assurance.

The risk that the client will fail to achieve its objectives related to (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with laws and regulations

The risk that the financial statements are materially misstated prior to the audit

Involves deciding whether to accept or continue doing the audit for the client, identifying the client's reasons for the audit, obtaining an engagement letter, and developing an audit strategy

An agreement between the CPA firm and the client as to the terms of the engagement for the conduct of the audit and related services.

Overall approach to the audit that considers the nature of the client, risk of significant misstatements, and other factors such as the number of client locations and past effectiveness of client controls.

Affiliated company, principal owner of the client company, or any other party with which the client deals, where one of the parties can influence the management or operating policies of the other.

Any transaction between the client and a related party

The official record of the meetings of a corporation's board of directors and stockholders, in which corporate issues such as the declaration of dividends and the approval of contracts are documented.

A quantifiable value used to measure how effectively a company is meeting its strategic objectives

The magnitude of an omission or misstatement of accounting information in the financial statements that individually or in the aggregate is substantially likely to influence the judgment made by a reasonable user of the financial statements

The materiality amount(s) for segments of the audit, set by the auditor at less than materiality for the financial statements as a whole

The maximum amount by which the auditor believes that the statements could be misstated and still not affect the decision reasonable users; used in audit planning

A change in the auditor's preliminary judgment made when the auditor determines that the preliminary judgment was too large or too small

The process of assigning to each balance sheet account the misstatement amount considered to be material for that account based on the auditor's preliminary judgment

The application of performance materiality to a sampling procedure (AICPA standards) or the materiality allocated to any given account balance (PCAOB standards)

Specific misstatements in a class of transactions or account balance identified during the audit

Misstatements that arise either from differences between management's and the auditor's judgment about estimates of account balances or from projections of misstatements based on the auditor's test of a sample from a population

= ( Net misstatements in the sample / Total sampled ) x ( Total recorded population value )

Risk of reaching an incorrect conclusion inherent in tests of less than the entire population because the sample is not representative of the population; sampling risk may be reduced by using tan increased sample size and an appropriate method of selecting sample items from the population